The United States tax system affords small-scale business owners a large amount of flexibility in the way they pay taxes. Small business owners have the ability to select and decide which method of paying taxes, while reducing their tax-deductible income while also being more efficient. One way to accomplish this is to file their taxes as an S corporation. In order to complete this, they have to complete Form 2553.
However, all this flexibility comes from a complex and rigid bureaucratic system. It isn’t easy to navigate through the system can be a challenge and a single mistake could have disastrous consequences, such as back taxes as well as fines, and in extreme instances, even jail time. So, it’s crucial to fill all paperwork correctly and submitted at the correct time. Below, we’ve provided easy Form 2553 guidelines, so you can reap the tax advantages when filing as an S-corp.
What is Form 2553 used To Do?
Form 2553 is employed by C-corporations as well as Limited responsibility companies (LLCs) who wish to file tax returns by filing as S-corps. What are the reasons why they would want to file their taxes as an S-corp rather than an ordinary LLC or corporation? The reason could be due to the strategy. The other reason is tax burden. If your aim is to expand your business, you’ll need to reinvest the majority of your profits as you can. If your company produces a significant amount of profits–profits you’d like to keep in your pocket, then filing an S-corp tax form is the best option.
Traditional C-corps pay corporate tax on their profits. If the profits are given to shareholders each shareholder is responsible for personal income tax on the money they receive. Small-scale businesses that want to get around the “double taxation” of company profits may want to look into filing Form 2553, and deciding to be taxed in the form of an S-corp.
An S-corp operates under an tax structure that is pass-through. It does not pay corporation income taxes. It’s more like company earnings “pass over” to owner (shareholders). Owners are required to report their portion of company profits when they file their own tax returns and pay taxes at their individual tax rates.
LLC owners usually have a different motive to file a Form 2553, S-corp election. According to the standard LLC taxation structure the owners who are employed by the company are self-employed and are required to report their portion of LLC earnings and expenses in their tax return for personal use. They also have to pay tax on self-employment (Medicare as well as Social Security) taxes on the total amount of LLC’s earnings.
If an S-corp is filed it is much simpler to LLC owners to earn profit from their company and reduce the tax burden of self-employment. If an S-corp is filed owners earn a conventional salary and get “distributions” during specific intervals during the course of the year. Owners have to pay taxes on income, Social Security and Medicare taxes on their normal salary. However, owners pay only income taxes on distributions–Social Security and Medicare taxes are not collected.
Instructions for completing Form 2553
Before you begin preparing any paperwork it is important to determine if your business is eligible to file an S-corp. The below requirements must be met for you for you to submit Form 2553
The business is a local company or local entity (such such as LLC) that can be considered an entity
The company has shareholders of 100 or less
The sole shareholders are individuals estates, exempt corporations, exempt societies in accordance with the section 401(a), 501(c) or certain trusts as defined under section 1361(c)(2)(A)
It does not have any nonresident alien shareholders.
It is the only stock class
This isn’t a banking or thrift institution, an insurance company which is taxed under subchapter L under the Code or a national foreign sales company (currently as well as in the past)
It has an annual tax year that runs until December 31, which is a natural business year or one that is owned by the taxpayer or a tax year that is opted under section 444 or a 52-to 53-week tax period that concludes by reference to the prior year as well as any tax year that the corporation has the business objective.
All shareholders agree to the voting
After you’ve decided that you’re eligible for the application, then you must ensure that filing for an S-corp can be considered viable. Remember that there are expenses associated with filling out Form 2553. It’s not logical to invest X in tax services to lower the taxes by the amount of Y when X is more than Y.
Also, you must be sure to complete the form prior to the deadline that is not greater than two years and fifteen days from the date of the start of tax year during which the decision will be effective or at any point in the tax year prior to the tax year when the form is effective. The IRS allows relief for forms that are filed later than the due date, provided that a company can demonstrate a legitimate reason to justify the reason why the form was late in filing.
The process of preparing Form 2553 can be a demanding task. In the instructions for Form 2553 it is stated that the IRS estimates that companies who file Form 2553 will need to spend around 10 hours in record-keeping and two-and-a-half hours studying the Form or the law, and around four hours in preparing and submitting this form back to IRS.
Once you’ve decided that you’re eligible to file an S-corp, and that you have enough time to file your paperwork prior to the deadline (or provide a reasonable explanation for the reason why you’re not filing on time) then it’s just a matter of filling in and submitting the form with the IRS.
Complete Your Form 2553
Form 2553 consists of four sections each one dealing with specific kinds of information. Let’s take a look.
Similar to all forms, the initial part is the place to fill in the most basic information regarding the company like the name, address and the Employer Identification number (EIN). Additionally, you must supply an IRS with the effective date of Election and an inventory of the shareholders and shares they hold as well as signatures from an officer from the corporate office and all shareholders.
Part II is designed for people who selected box “2” or “4” in Part I, item F to indicate an fiscal year or a 52-to 53-week tax period that doesn’t end in December. If you’re required by law to fill out this section, you should talk to an accountant, as it’s quite complex.
Part 3 of the Form 2553 is specifically designed for Qualified Subchapter S Trusts (QSST). If you’re required to fill out Part III make sure to remember that you must submit the selection in Part I, since the Part III of the Form 2553 is not able to be filed on its own.
The Part IV section of the Form 2253 applies to businesses in which “the corporate classification election was intended to take effect on the same day the late S-corporation election was to become applicable.”
Submitting Your Form 2553
Once you’ve completed Form 2553 after which you have to submit it at one of two places according to the location you filed it to.
People who file the form in Connecticut, Delaware, District of Columbia, Georgia, Illinois, Indiana, Kentucky, Maine, Maryland, Massachusetts, Michigan, New Hampshire, New Jersey, New York, North Carolina, Ohio, Pennsylvania, Rhode Island, South Carolina, Tennessee, Vermont, Virginia, West Virginia or Wisconsin can send the form in the direction of IRS. IRS in the Department of Treasury office in Kansas City, Missouri.
The people who file for Alabama, Alaska, Arizona, Arkansas, California, Colorado, Florida, Hawaii, Idaho, Iowa, Kansas, Louisiana, Minnesota, Mississippi, Missouri, Montana, Nebraska, Nevada, New Mexico, North Dakota, Oklahoma, Oregon, South Dakota, Texas, Utah, Washington or Wyoming can send their applications for their local IRS in the Department of Treasury in Ogden, Utah.